Life Insurance Beneficiaries: Divorce And Your Entitlements

Life insurance is often overlooked during divorce proceedings, but it's important to understand how it works in this context to protect the financial interests of both parties and their dependent children. Typically, term life insurance policies are considered separate assets, while the cash value in permanent life insurance policies may be considered joint assets. In the event of a divorce, it's crucial to update beneficiaries and policy owners to reflect the change in marital status. While it depends on the specific situation, there are both personal and legal reasons why life insurance may still be necessary after a divorce, especially if there are children involved.

Changing beneficiaries

Review your life insurance policy

It's crucial to review your life insurance policy after divorce, especially if you have children or financial obligations to your ex-spouse, such as alimony or child support. Consult a legal or financial advisor to understand the implications of any changes you're considering.

Update beneficiaries

In most cases, you will no longer want your ex-spouse to benefit from your life insurance policy after a divorce. The easiest way to change the beneficiary is to contact your life insurance provider and verify if the policy is revocable. If it is, you can redesignate the beneficiary. However, some policies have irrevocable beneficiaries, which means the beneficiary cannot be changed without their agreement.

Consider your children

If you have underage children, you may need to keep your ex-spouse as the beneficiary to ensure they are financially protected. Additionally, in some cases, a judge may require you to maintain life insurance with your ex-spouse as the beneficiary if you're paying spousal or child support. Once your children reach the age of majority, you can file a motion to amend the divorce agreement.

Account for cash value

Life insurance policies, especially whole life and universal life policies, may accumulate cash value over time. This cash value is often considered a marital asset and should be divided as part of the divorce settlement. Cashing out the policy and splitting the proceeds is often the simplest solution.

Protect alimony and child support

If you have primary custody of your children and receive alimony or child support, maintaining a life insurance policy on your ex-spouse can ensure that this income is protected. This is especially important if your ex-spouse is not fulfilling their financial obligations. The benefit amount should be high enough to replace the lost income until your children are no longer minors.

Cashing out policies

Permanent life insurance policies, such as whole life and universal life insurance, accumulate cash value over time. Each month, when you make your premium payment, a portion of that money is set aside into a fund that grows with interest. This fund is the policy's cash value.

There are a few different ways to access the cash value of a permanent life insurance policy:

Withdraw your entire cash value

You can surrender your policy and receive the full cash value, minus any surrender fees. However, this will end your coverage, and you will generally have to pay income taxes on the money.

Make a partial withdrawal

You can choose to withdraw only a portion of the cash value, rather than the full amount. This allows you to keep your policy active, but the death benefit will be reduced. Check if the withdrawal will be taxable.

Borrow money from your life insurance

If you have had your policy for several years, you may be able to borrow money from the policy's cash value. This option does not require you to pay taxes on the borrowed amount, but interest charges will be deducted from your cash value balance. If you do not repay the loan before you die, the outstanding balance and interest will be subtracted from the death benefit paid to your beneficiaries.

Sell your policy

You can sell your policy to a third party for a lump sum that is greater than the cash value but less than the death benefit. This is known as a life settlement. The third party will then take over the premium payments, and they will receive the death benefit when you die. To qualify for a life settlement, you typically need to be at least 65 years old or have a certain level of health impairments.

It is important to carefully consider your options before cashing out a life insurance policy, as it can have significant financial implications. Consult with a financial advisor or insurance professional to understand the specific details of your policy and the potential impact on your coverage and beneficiaries.

Child support

Life insurance can be used to ensure that child support payments continue in the event of the paying parent's death. This can be done by securing child support obligations with a life insurance policy. The life insurance policy can be made payable to the child, but this can create a difficult and expensive problem. Instead, the insurance proceeds can be left to someone designated as a "custodian" under the Uniform Transfers to Minors Act (UTMA) for the benefit of the child. The custodian can hold the property for the benefit of the child until the age of majority (which varies by state), at which point whatever is left in the account is given to the child.

Another option is to designate the ex-spouse as the beneficiary of the life insurance policy, with the intention that they will use the funds to support the child. However, there is no guarantee that the surviving spouse will use the proceeds for the children, and the proceeds may be affected by bankruptcy or claimed by the ex-spouse's present spouse.

To prevent the payor from changing the beneficiary designation of a life insurance policy, the recipient (the ex-spouse or a trust for the benefit of the children) can own the policy. This gives them the right to change or not change beneficiaries.

In some cases, a court may require the purchase of life insurance to secure child support payments. This is more likely if the payor parent dies before the child support obligation is over. The life insurance policy can also be made payable to a trust, which can then distribute the funds to the child or the surviving parent.

It is important to note that the laws and regulations regarding life insurance and child support may vary from state to state, so it is always a good idea to consult with a lawyer or financial advisor to understand the specific implications for your situation.

Alimony

If you're required to pay alimony to your ex-spouse, a divorce decree might mandate that you keep your ex as a beneficiary of your life insurance policy. This ensures that alimony payments continue if you pass away. In this case, the beneficiary cannot be changed after the insured person dies. However, if you own the policy and are not financially supporting your ex-spouse post-divorce, you can likely remove them as the beneficiary.

If you are receiving alimony, it is recommended that you own the life insurance policy of your ex-spouse. This gives you control over payments and naming beneficiaries. Additionally, you can request third-party authorizations on the account to be alerted of any changes to the policy, such as a lapse in coverage, or be informed directly by the insurance company if you are removed as a beneficiary.

In the case of divorce, the cash value of a permanent life insurance policy may be considered joint and thus divided equally. If the policy is terminated, the cash value can be split equally.

Court-ordered insurance

Court-ordered life insurance is a requirement that may be mandated during divorce settlements, especially when child support or alimony payments are involved. This type of life insurance ensures that financial support for children and alimony recipients is secured in the event of the paying spouse's death. Here's what you need to know about court-ordered life insurance:

Ownership of Court-Ordered Life Insurance

The owner of a court-ordered life insurance policy can be either spouse or a third party. In amicable divorces, ownership is usually straightforward, with both parties agreeing on the owner. However, in contentious situations, a neutral third-party owner like a custodian or trust may be preferred to prevent unwelcome changes to the policy. It's important to note that maintaining a trust incurs additional costs.

Beneficiaries of Court-Ordered Life Insurance

In cases involving alimony, the recipient spouse is typically designated as the beneficiary. They may also be named as the policy owner, while the paying spouse becomes the insured and is responsible for premium payments.

For child support, the recipient spouse is often the beneficiary, unless there are concerns about their ability to manage the funds appropriately. In such cases, a trusted friend or family member can be named as the beneficiary, or a trust can be established to manage the funds in the child's best interest.

Requirements and Timeline for Court-Ordered Life Insurance

When court-ordered life insurance is mandated, the court will provide instructions on the type of coverage, coverage amount, policy duration, and any specific conditions that must be met. It's crucial to review these requirements carefully and designate the appropriate beneficiaries as specified by the court.

The court will also set a deadline by which proof of purchasing the required life insurance policy must be provided. Obtaining life insurance can take time, so it's important to start the process early to ensure you meet the deadline.

Duration of Court-Ordered Life Insurance

The duration of court-ordered life insurance depends on the nature of the financial support it secures. For child support, the policy is typically maintained until all children reach the age of maturity, which varies by state (18 or 21). For alimony, the coverage should last as long as alimony payments are required, and these laws also differ by state.

Changing Court-Ordered Life Insurance Beneficiaries

Once the obligation for court-ordered life insurance ends, you have the option to change the beneficiary. For instance, if the court-ordered life insurance was due to child support, you can change the beneficiary once your children reach adulthood. Similarly, if the court-ordered life insurance was due to alimony, you can change the beneficiary once your alimony obligations are fulfilled.

Frequently asked questions